Retail's Latest Challenge: Higher Trade Tariffs
May 13 2019 - 8:29AM
Dow Jones News
By Michael Wursthorn
Shares of retailers, buffeted by rising trade tensions in recent
sessions, face a key test this week when Macy's Inc., Walmart Inc.
and others begin reporting quarterly earnings.
The S&P 500 Retailing index fell 3% last week after
President Trump pushed ahead with tariff increases on billions of
dollars of Chinese imports, outpacing the broader benchmark's 2.2%
decline. Shares of Macy's slid 3.4%, while J.C. Penney Co. and
Ralph Lauren shed more than 5% each. Stocks averted deeper declines
after Treasury Secretary Steven Mnuchin said Friday's trade talks
were "constructive" despite ending without a deal.
The slides could worsen this week, once retailers begin
reporting earnings, analysts said. Investors will want details on
how merchants plan to absorb 25% tariffs on more than $40 billion
worth of goods that are imported from China and directly purchased
by U.S. consumers.
The tariffs, which took effect Friday, hit clothing, luggage,
handbags and furniture, among other consumer products. And
retailers have few options: they can absorb the added costs
themselves; spread them across their vendors; or pass them on to
customers.
None of those options is particularly attractive, analysts said,
and retailers' pain could signal broader implications for the U.S.
economy. Initial estimates project the additional tariffs will
shave 0.3% from U.S. growth this year.
"When this tariff conversation started last year, retailers were
in a stronger position," said Simeon Siegel, a senior retail
analyst at Instinet. At the time, economic conditions were better
and retailers were cutting back on inventories. "But now things
have normalized, inventories are up again and retailers can't
really raise prices."
Profit margins are already under pressure, as companies like
Walmart and Target have been spending heavily on upgrading their
digital capabilities and remodeling their stores. Absorbing higher
tariff-related costs would further stifle margin expansion,
analysts added.
In the previous earnings reporting season, both reported slimmer
profit margins, but results were upbeat overall, helping to send
shares higher. Walmart's stock remains up 9.4% this year, while
shares of Target have added 13%.
Consumer discretionary stocks, excluding internet retailers, are
expected to see a 5.2% contraction in first-quarter profit margins
from a year earlier, according to data compiled by Credit Suisse.
Margins among consumer staples, which include stocks like Walmart,
are expected to shrink 5.8%.
That could lead retailers to raise prices in an effort to
protect their margins, analysts said, but companies run the risk of
stifling revenue if customers pull back on spending. Consumers'
pockets appear relatively healthy thanks to a tight labor market
and rising wages. But retail spending has been mixed in recent
months following a weak holiday sales season, a sluggish February
and a bounce back in March, according to Commerce Department
data.
With a 25% tariff on apparel items, retailers would have to
raise prices by 2.3% to maintain their gross margins, according to
analysts at Bank of America. If they can't raise prices, analysts
say the tariffs could compress retail earnings by 39% this
year.
Some companies have been trying to insulate themselves from the
U.S. and China trade spat, which could soften the blow of tariffs,
analysts said. Several companies have been shifting production from
China to other Southeast Asian countries in recent years. Others
had been rushing goods over from China, ahead of the tariffs,
Credit Suisse's retail analysts wrote in a note last week.
Even if the fallout isn't as bad as expected, the market has
reacted harshly to the idea of tariffs. Last year's volatility was
spurred, in part, by President Trump's protectionist policies. And
the S&P 500's 2.2% slide last week -- its biggest weekly loss
of the year -- came after President Trump's initial threat to raise
the levies on Chinese imports.
As long as tariffs remain in place, investors' doubts alone
could be enough to drag retail-stock prices even lower.
"The fear of global trade...deteriorating amid macro fears
during previous U.S./China escalations" had the biggest impact on
stocks over the past six months, Credit Suisse analysts said, even
though costs didn't drastically increase.
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
May 13, 2019 08:14 ET (12:14 GMT)
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